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February 19, 2010

Reforming Budget System Laws

Posted by Ian Lienert

A new Technical Note and Manual (TNM) entitled Reforming Budget System Laws has been issued. TNM/10/01 is mostly unchanged from the Guidance Note on this issue, authored by Israel Fainboim and myself and published on the PFM blog on October 22, 2007. The TNM explores the variations and provides principles to guide countries seeking to draft new budget laws or to amend existing laws.

The TNM points to the opposite positions that OECD countries have regarding the need to adopt a law – or laws – for providing a framework or rules for government budget processes. At the one extreme, Denmark and Norway have never adopted a formal law to govern the budget system. At the other extreme, the United States has adopted many laws relating to the federal budget system (not to mention State level laws). Most countries lie between the extremes of these two countries.

Some, but not all, countries have constitutional requirements relating to the budget system, such as a golden rule (see the PFM blog post of September 4, 2009). Some countries have “budget principle” legislation to guide other laws (e.g., some Latin American countries) and others have “organic budget laws” (e.g., France), which have a higher status than ordinary laws that specify budget processes. More generally, the legal basis for budgeting reflects not only the legal system, but also different political choices regarding the type of budget system, as well as differences in administrative, organizational, and cultural arrangements.

Given the diversity regarding the role that law plays in providing a framework for the budget system, a “model law” is not proposed in the TNM, which is divided into five parts:

1. the reasons for adopting a new law for the budget system; 2. the legal context; 3. political economy considerations; 4. the responsibilities of budget actors; and, 5. the various stages of budget processes that could be specified in law.

The fifth section is the most important and includes the following 11 budget principles:

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Comments

This is fundamentally the same trouble that we see in the fiscal sphere -- decisionmakers are incentivized to go for short term benefits over long term firmness. And to send their organisation to borrow other people's money to do it. For executives in the fiscal sphere, it 's the yearly incentive and the condition that goes with financial success ; for political leaders it's a different kind of income, the psychical income of being elected and re-elected and the condition of being a loss leader of sortings. But it's exactly the same moral force in both vitrines.